From Bhopal to Niyamgiri: A lesson for the corporate world

‘Save the real Avatar tribe’ – read a poster held by weirdly dressed, blue painted protesters in London earlier this year. Dressed up like the Navi tribe in James Cameron’s Hollywood blockbuster ‘Avatar’, the protesters demanded scrapping Vedanta Resources’ mining project in Orissa’s Niyamgiri, a bauxite-rich hill which is home to thousands of tribals.

The protest marred Anil Agarwal-owned Vedanta’s Annual General Meeting (AGM) and the company had a harrowing time taking its shareholders in confidence about its mining projects. Vedanta wants to mine bauxite from the Niyamgiri hills in Orissa’s Kalahandi district for its alumina plant, located in the adjacent Lanjigarh village.

Critics say the ecological and cultural sacredness of Niyamgiri is threatened by the proposed bauxite mining by Vedanta. Notably, the hill is the source of Vamshadhara river as well as major tributaries of Nagavali river. Moreover, its flora and fauna is considered as rare. Inhabitant Dongria-Kondh tribes also believe the hills to be a sacred place. Like the Navi clan in Cameron’s movie, the Dongria-Kondh tribe has been protesting against the mining giant over years.

There were accusations that the ruling BJD-government in Orissa is hand-in-glove with the London-listed Vedanta. The company, on the other side, doesn’t have a very good track record of protecting and respecting nature. It had been criticised in the past by Amnesty International, as well as by the Church of England for its raw handling of nature and affected people.

The strongest blow to the project has come from the central government, which has refused to grant it environment clearance. Adding to Vedanta’s worry, heir apparent Rahul Gandhi visited the proposed mining site and declared solidarity with the protesting ‘Avatar Tribe’.

The mainstream media was unequivocal in its response welcoming the ban. The industry too was cautious in its approach.

However, the Financial Express, arguing against the ban said, “You can’t possibly hope to get 9- 10% growth rates without serious investments, and without huge acquisitions of land for just basic dwelling.”

True we can’t aspire for a China-like growth rate without conceding some ground. Without displacing some, we cannot build factories.

Sullied Past

"Vedanta Aluminium Ltd`s (a subsidiary of Vedanta Resources) alumina refinery has led to water and air pollution, seriously undermining the quality of life and threatening the health of nearby communities," an Amnesty International report said earlier this year on the Lanjigarh project.

In 2007, the Norwegian state pension fund sold its shares in the company, saying being an investor would present an “unacceptable risk of contributing to severe environmental damage and serious or systematic violations of human rights”.

There were also allegations that Sterlite Industries, another subsidiary of Vedanta, lets out gallons of effluents into the sea in the southern seaside town of Tuticorin, Tamil Nadu. Vedanta had also been driven out of Ratnagiri, Maharashtra, on environmental grounds 13 years ago.

In 2009, in a deadly accident in Balco’s Chhattisgarh plant, 40 people were killed creating uproar all over the world about the company’s safety record. Moreover, the Madras High Court had in 2008 stayed Malco, another Vedanta firm, from mining in Tamil Nadu’s Koli hills.

Change in Corporate Behaviour

The Niyamgiri episode has coincidentally come weeks after the court verdict in the Bhopal gas tragedy. There is a correlation between the two.

In both the cases, multi-national companies are involved - with a very poor record for preserving environment and respecting people’s rights.

The Vedanta episode will serve as a wake up call to all those corporations which are planning major investments in India – the era of back door clearances is over. They now have to undergo legal procedures, irrespective of the volume of investment they bring in, and take the affected people into confidence.

Things do change over years. In 1980s, not many raised concern over a government action against Dow Chemicals in the Bhopal gas tragedy case, saying such a move would hamper FDI flow into the country. Today also many minds think the Vedanta episode would hit the wealth flow into India.

What they forget is that the drive for industries without considering the environmental issues is not sustainable. Corporations should rise up to expectations of a ‘sensitive economy’. In other words, the term ‘good corporate behaviour’ is increasingly gaining currency in a globalised world.

British Petroleum learnt it the hard way after Gulf of Mexico oil spill. Following criticism, it went to the extent of abandoning exploration of oil from the Arctic. Another oil giant, Swedish Lundin is under investigation for alleged complicity in Sudan war crimes. Swiss banks are also being slammed for covering up the details of people with black money.

Making profit is not a bad thing, but earning it at the expense of environment and others’ life is certainly very bad.

Should India ban iron ore export?

Wealth unused might as well not exist - Aesop (620 BC-560 BC) Greek fabulist

During the British Raj, the Empire used to export minerals and raw materials from India and dump finished products here – a major point in the Drain of Wealth theory. Half a century later, we still face a similar situation, albeit with a difference.

Today, despite our economic growth, we continue to export our valuable minerals to other countries in huge volumes. Recently this, prompted by a series of national and international events, has triggered a debate in the country on whether India should continue to export minerals, especially iron ore in view of its limited availability and huge domestic demand.

Similar discourses touched off in other mineral rich countries as well. Australia had recently decided to slap a 40 percent Super Profit Tax on all mining companies operating in the country's soil. It later remodelled it as Mineral Resources Rent Tax and lowered the proposed levy to 22.5 percent, which may be introduced by 2012.

In India also, demands rose from several quarters for similar taxes to curb the unbridled mining and exports of resources. Assocham, a leading industry lobby in the country, has called for a levy of 40 percent on mining activities in a bid to curb exports of iron ore. The demand coincides with a similar proposal made to the Finance Ministry by the Mines Ministry for a windfall tax on domestic miners. The Steel Ministry has demanded a complete ban on iron ore exports. Facing rampant illegal mining, several states also have demanded controls on exports.

According to Karnataka Chief Minister BS Yeddyurappa, if iron ore exports were not checked, the “undue exploitation and illegal mining are likely to continue”. Chhattisgarh, which has roughly 20 percent of India’s iron ore reserves, has sought a ban on iron ore exports. NMDC chairman and managing director Rana Som also share the same view.

India is now exporting more than 100 million tonnes of iron ore every year. According to industry exports, the country cannot continue this trend for an indefinite period as it has to give more focus on the domestic market. Incidentally, China – the biggest consumer of minerals and another booming power – has been quietly increasing export tax on commodities like coal, coke and steel products in order to conserve the raw materials.

The country’s steel makers also share the same view. As most steel makers are gearing up to expand their production capacity, demand for iron ore is expected to soar in the near future. Therefore, putting restrictions on exports is good for the domestic steel industry.

Notably, India's steel output is likely to more than double to 120.6 million tonnes by March 2012 from 55.1 million tonnes last year, still well short of China's more than 600 million tonnes currently. Based on planned projects, the capacity could go up to 293 million tonnes by 2020, or more than five times the current figure.

Fact Sheet

India has one of the largest iron ore reserves in the world. According to Project Monitor, an internet newspaper on industrial projects, India's iron ore reserves are around 22,000 million tonnes which will be sufficient for the next 150 years at the current rate of production.

At present, India is the world's third-largest iron ore supplier and exports roughly half of its total iron ore production, mainly to China, which houses the world's largest steel industry.

In the 2009-10, India produced 226 million tonnes of iron ore, up from 215 million tonnes in the previous year. Official data showed that exports have nearly tripled over the last decade, from 37.49 million tonnes in 2000-01 to 105.86 million tonnes in 2008-09. From April 2009 to January 2010, exports surged 10.5 percent to 89.20 million tonnes.

The price of iron ore has doubled in a year in the global markets and is now hovering around USD 120 a tonne. This, however, doesn’t always translate into higher revenue for the government. Thus, while iron ore exporters are reaping windfall gains, benefit to the exchequer is negligible when prices of ores increase in the market.

To restrict this, the government last year raised the export duty on iron ore lumps to 15 percent from 10 percent. Last December, it introduced a 5 percent export duty on iron ore fines. Over 70 percent of India's iron ore exports comprise fines that are mostly bought by China, which has the technology to blend it with high-grade ores procured from Australia and Brazil.

Is a ban feasible?

Any clampdown on ore exports by India would send shockwaves through the USD 88-billion international market, forcing up prices and increasing Chinese reliance on top producers like Australia and Brazil.

China, which has the world's largest steel mills, would then have to pay higher prices to procure the materials from other countries. Also, Indian miners would have to bear losses from lower prices offered in the domestic market. On the contrary, the export ban would come as a great relief for the domestic steel industry, which will get its raw material at a lower cost.

Some analysts say banning iron ore exports will also severely impact the mining industry by putting thousands out of their jobs. A similar propaganda was carried out by several Australian miners when Canberra announced its intention to impose the Super Tax. Another bigger contention was that the country currently does not have the technology to process fines so it is better to export the rotting wealth.

Conclusion

True, India doesn’t have cutting-edge technologies at present. But, several giants including Posco and Vedanta are queuing up set up huge production units in the country. Obviously, they will bring in necessary technologies to harness the opportunity. Minerals and ores are precious and limited. They cannot be regenerated. Hence, should be used cautiously.

After all, India has to boost its steel output to meet its rising growth ambitions. Steel consumption is expected to rise many-fold as the country is giving special focus on building infrastructure. Scarcity and high prices of iron ore in the domestic market due to continuing large-scale exports will not be good news for the steel industry.

Given the larger interests of the country, the lawmakers should give India’s export policy a second thought.

Can Wall Street reforms prevent another crisis?

The pendulum of economies is now swinging back to a condition of state control from erstwhile days of free market, all thanks to the global financial crisis. Even the outright neo liberals now agree that there should be some sort of regulation at the financial market to prevent the 2008-model crises. No wonder that it’s the US, the Mecca of free-market capitalism a few years back, which is leading the struggle against unregulated financial markets.

A few days ago the US Senate passed a bill on banking reforms (Restoring American Financial Stability Act of 2010), which has been initially hailed as “historic”. The bill is a major initiative to regulate the financial industry in 80 years since the Glass-Steagall Act, which separated commercial and investment banking in 1933.

Notably, the Senate bill has to be merged with a measure passed in December by the House of Representatives (Wall Street Reform and Consumer Protection Act of 2009). A House-Senate conference committee will do that and give final touches to the bill before sending it to President Obama for signing. The final version could differ from the House and Senate bill.

The bill is an outcome of the financial crisis, which opened a can of worms. The sub prime crisis started in the US grew into the worst financial crisis since the Great Depression and pulled down a number of financial institutions, including the US investment giant Lehman Brothers.

The preceding months saw deep introspection around the world about the causes of the meltdown. Big bankers and market speculators came in for sharp criticism for their practices which were eventually blamed for the financial crisis.

Since then, there have been calls from various quarters for strong regulatory provisions to prevent similar crises in future.

The current bill must be looked at from this perspective and was one of the key promises of President Obama.

Provisions

The bill aims to rein in Wall Street giants whose practices culminated in the 2008 meltdown.

According to the bill, which is yet to be made public, a mechanism will be in place to watch out for risks in the financial system and create a method to liquidate large failing firms.

The Senate bill provides for an "orderly liquidation" process, instead of bankruptcy. This is to avoid a repeat of 2008, when the US administration launched costly taxpayer bailouts of firms such as AIG.

Also, authorities could seize large firms in distress and put them in Federal Deposit Insurance Corp (FDIC) receivership, with liquidation required as the next step.

Notably, shareholder and creditors have to bear losses and not taxpayers as is the case today. Authorities could also fire the management of the ailing firm. The FDIC’s costs would be covered by sales of the liquidated firms’ assets and, in case of shortfalls, fees slapped on other large firms.

Also a new consumer protection agency is in the pipeline that will tackle "abusive" mis-selling of mortgages, credit cards and other loan products.

However, banks and other financial institutions have cautioned that this will in future create hurdles and may lead to ban on certain items.

The most controversial are the rules on the unregulated USD 615-trillion over-the-counter derivatives market. As per the current suggestions, over the counter derivatives have to be traded on exchanges or cleared through central counterparties. This will oblige banks to spin off some of their derivatives trading activities into separate entities – which the Federal Reserve and Treasury had opposed.

(Derivatives are instruments that let companies hedge interest-rate risks or changes in commodity prices. They are also used for speculation.)

The bill proposes one Financial Stability Oversight Council of regulators chaired by the Treasury Secretary. The new body will identify risks in the financial system.

If implemented, the US companies will face stricter capital, leverage and liquidity requirements and will have to draw up plans to ensure an orderly wind-down should they fail.

The government can also seize and wind up a large financial institution if it runs into difficulties and poses a risk to the wider financial system.

Will it prevent another crisis?

The bill has been hotly debated world-over and many have already pointed out its flaws.

In an article, the New York Times pointed out many loopholes in the bill. “The House bill would force some trades into a clearinghouse but would allow far too many exemptions. The Senate bill is stronger. It’s probably too strong, in fact. It effectively bans many big firms from trading the most lucrative type of derivatives. That’s not so different from a ban on subprime mortgages, which, of course, also helped cause the crisis,” said the paper.

Also, the US Federal Reserve had been severely criticised for its role leading up to the financial crisis. Empowering it with a whole new range of new powers would not guarantee that the Fed would successfully prevent another crisis.

On the bailout front, there were some criticisms too.

According to analysts, a permanent tax on banks could be a better option than setting up a fund for bailing out falling giants.

“Undoubtedly there will be further problems, it’s just the nature of business and the financial business in particular. But this will avoid some significant problems and limit the impact of others,” Harvey Goldschmid, a former SEC commissioner, has commented on the bill.

Similarly, CNN has slammed the bill over mortgages and rating agency provisions.

“The Senate bill -- and a similar House measure -- would do much to make the financial markets safer and fix many of the problems that arose. But it falls short of fundamentally changing the way that financial institutions do business,” it said.

On the bailout front, the Senate bill suggested that government will recoup the amount from the industry after the crisis is over. This is like punishing the survivors for the mistakes of someone else.

Despite the huge claims of the Obama administration, many analysts remain sceptical about the bill. Is it a big step, or just a baby step is the key debate. In either case, one has to admit that the bill has changed the rules of the game.

Will the World Cup change South Africa?

With big opportunities, come huge risks too. The FIFA World Cup-2010, the world’s biggest extravaganza, could be an example of what a big sporting tourney can do for a country’s economy. It can give a much-needed boost for the nation – prompting the government to spruce up its infrastructure, boosting tourism and industry sectors and creating employment for the poor. It can also leave a country struggling with huge fiscal deficit, rising inequalities and a host of scandals.

How is South Africa, which according to Newstatesman is the ‘most unequal country in the world’, going to benefit from the FIFA World Cup-2010? Will it transform the largest economy in Africa? Or, will it leave the country struggling with more economic problems?

Well, it is unfair to compare this year’s World Cup event with any other past sporting extravaganza. South Africa is hosting the tournament at a time when the world economy is still struggling to offset the effects of the Great Recession. A debt crisis in Europe is threatening the fragile economic recovery and the global markets are yet to return to their pre-crisis level highs.

In an article titled “It’s the first recession World Cup”, the UK’s Independent daily aptly summarised: “The World Cup will after all prove a relative economic success, be a timely boost, both to the people of South Africa and to businesses back in the UK.”

Like many other emerging economies, South Africa was also hit badly by the global slowdown. The country, after a brief spell of recession, returned to growth in the third quarter of 2009. The country’s economy is heavily dependent on its minerals, making it susceptible to the global demand for gold, coal and minerals. The economy contracted 1.8 percent in 2009 when global demand plunged and financial markets in the western countries collapsed.

Thanks to the global recovery and the higher spending due to the World Cup, the country is expected to grow 3.3 percent in the current year, and 5 percent in 2011. According to the government, the World Cup would add about 0.5 percent to GDP this year. Since 2006, the South African government has spent whopping USD 5.5 billion (43 billion rand) in building stadiums and infrastructure to attract investors and tourists – pushing up the fiscal deficit to 6.7 percent of the GDP.

This is apart from the expenditures on airports (17 billion rand, or USD 2.2 billion) and Gautrain rapid rail network (USD 3.3 billion).

A big sporting event usually brings tens of millions of dollars in the forms of tourism, hotel, bar and restaurant businesses, to name a few. The tourism sector will be the top gainer. The World Cup would be the single biggest opportunity for the government to promote South Africa as a destination point of global tourism. Notably, the rugby World Cup in 1995 shot up the number of tourists visiting the country by 60 percent. Industry analysts expect a bigger push during the World Cup season would make over the country’s tourism industry. South Africa expects about 370,000 foreign visitors during the event.

Companies related with the tourism industry have also done well in recent times. According to industry data, shares of wine, spirits and beer companies such as Distel and SABMiller outperformed the all-share index on the local bourses over the past year partly in anticipation of a World Cup boost.

Besides, local businesses could gain from the spending of visitors. According to accounting firm Grant Thornton, this will see infusion of at least USD1.7-billion cash into the economy. Construction is another booming sector. The building of new stadiums and other infrastructure created thousands of jobs over the past few years. It has also infused billions of dollars into the economy.

South African currency - rand - has also gained against the dollar in recent times on increased foreign exchange flows. The World Cup event, according to many, would be the most commercially successful event in the history of Football World Cup in 76 years.

Not all is well


However, there are criticisms too. The South African government was criticized by various quarters that it was diverting the money, meant to spend for the country’s millions of poor, to build infrastructure and other facilities for the World Cup.
South Africa, which has a very uneven social composition, saw violent protests in the past year for the same reason. The government has also been criticized for “forcibly” moving the impoverished out of cities to present a good image of the nation during the World Cup.

According to the Southern African regional Poverty Network’s estimates, close to 60 percent of the total populations are still living in poverty. Though the World Cup preparations have changed the face of major cities, the people living in interiors have hardly benefited. The jobs created by the construction sector started vanishing as the preparations wound up. Employment in the sector fell by 9.3 percent to 1.085 million in the first quarter of 2010, compared with the same period last year.

The real fight will emerge once the World Cup is over. More retrenchments and other economic hardships will follow, as it was seen in China after the 2008 Olympics. The government will be left with the stark social realities of the country. It seems there is no World Cup short cut for the myriads of problems South Africa faces today.

Is India ready for another oil crisis?

“Gote Magh re sita jaye nahi”, so goes a famous Oriya saying, which highlights the need for lasting solutions rather than makeshift arrangements to a problem. Unfortunately, when it comes to energy crises, Indian leaders always opt for temporary solutions, leaving the larger problem unaddressed. The present situation is no exception.

When the boom years came to a temporary end in 2008 with the worst oil crisis the world had ever seen, the Indian government, like several others around the world, appeared clueless on how to manage its oil economy. In those crisis days, the key challenge of the government was to keep the country’s oil economy afloat in an extremely adverse global scenario without letting inflation go northwards.

However, it seemed to have failed the test as inflation rose to a 13-year high in July 2008 when crude oil price was hovering around USD 140 a barrel.

Thanks to the economic crisis, oil prices plummeted. So did inflation in many countries. But as the global economy is steadily recovering and emerging countries like India and China are fast returning to high growth trajectory, with demand rising again, sending the prices of many commodities, including oil, to new highs.

Crude oil price is now hovering around USD 85 a barrel. It has jumped over 25 percent since February and is well on its way to cross USD-100 mark in near future. This sets the alarm bells ringing again.

Reasons of oil price rise

Like all other commodities, the price of oil is also fluctuated by the demand-supply factor. If supply does not catch up with the soaring demand, prices are bound to rise. The sharp rebound in emerging markets has spawned a new wave of demand for fuel. Developed economies too are showing signs of a revival. The improved car sales figures in the US underscore this point. However, the oil producing nations have not revised their output target to meet the rising demand. This demand-supply mismatch is the main reason for the recent rise in prices.

Moreover, there is an intrinsic relation between dollar and commodities including oil. Whenever the dollar declines, prices of petro products would increase. The reason: Oil is traded in dollars. When the dollar falls, oil investors/speculators tend to increase the price of the commodity so as to get the same value.

Effect on India: Inflation

Oil prices and inflation have a cause-and-effect relationship. As oil prices move up or down, the prices of other produces/services also follow the same path. This is because oil is a major input for many services. So if the input prices rise, the output prices would also go up.

India is already under the grip of the inflationary monster. As per the latest data, food inflation rose to 17.7 for the week ended March 27. All eyes now are on the upcoming rabi crop. However, a below normal rain in May-June period will seriously affect the crops – threatening to further push up prices.

With this being the case, what should India do vis-à-vis oil pricing? Is the government prepared to face up to a scenario where rabi crops are below the expectations and oil prices are above $100 a barrel? Simply put, are we ready to tackle an economic catastrophe that is in the pipeline?

Affect of oil prices on OMCs

The oil marketing companies have long complained that under the current pricing mechanism they are forced to sell oil below the prices at which they are sourcing it from the international market.

According to government estimation, the oil marketing companies have suffered revenue losses worth Rs 45,000 crore due to under-recoveries last fiscal, which could increase to Rs 70,000 crore by the current fiscal unless a price hike was effected.

State oil firms are currently losing Rs 6.12 per litre on petrol, Rs 4.60 per litre on diesel, Rs 18.42 per litre on PDS kerosene and Rs 265.27 per 14.2 kg LPG cylinder. The Kirit Parikh Committee, appointed by the Prime Minister to study the fuel pricing policy of the country, has suggested cutting down subsidies on cooking gas and kerosene and freeing prices of diesel and petrol from the clutches of government regulation.

Though the Petroleum Ministry is pressing for the implementation of the Committee’s recommendations, the government appears indecisive on what to do. The critics of deregulation say if the government leaves price fixing to the market forces, it will have cascading effects on inflation.

There was, however, a section which chooses to differ with the theory.

“Crude has doubled from USD 40/barrel a year ago to USD 80/barrel today. Yet countries without price controls, which have passed on the full cost to consumers, have far lower inflation rates than India. Clearly the theory of oil prices cascading into everything else is a myth. Cost-plus pricing may have been common in the bad old licence-permit Raj, but not in a deregulated market,” Swaminathan S Anklesaria Aiyar argued in an article published last month.

Solutions?

India meets a large chunk of its crude oil demand through imports. Hence any price movement is bound to create ripples in the domestic front too. Indians not only had to suffer the financial crisis, but also has had to bear the brunt of high inflation. Another crop loss coupled with high oil prices will took the sheen away from high growth figures of the economy.

The government has so far refused to act boldly on the fuel pricing front. Over the years, successive governments have played to the gallery rather than making moves in the right direction. The government should give utmost priority to energy security and invest heavily in oil exploration, as well as look for other sources of energy. It could also aggressively tap the resources of other countries, possibly in Africa, and set up reserves to meet emergency situations.

True, it is unlikely that the government can do anything now on an ad hoc basis vis-à-vis the energy challenges. Securing a steady source of energy needs long-term planning and clinical execution. A continuing, persistent and well though-out strategy is needed if we want to secure the future of our country. It’s high time India started thinking as a major global power with ambitious plans.

RBI hike expected, but will it tame inflation?

Once again, the Reserve Bank of India (RBI) has chartered the rule-book way to tame inflation, but very cautiously.

On Tuesday, the RBI raised its key lending and borrowing rates as well as the cash reserve ratio (CRR) by 25 basis points (0.25 percent) each. This is the second time in as many months that the central bank has raised rates to choke out money from the markets as inflation is rising as a potential threat to India’s economic recovery.

The central bank lifted the reverse repo rate, at which it absorbs excess cash from the banking system, by 25 basis points to 3.75 percent. It increased the repo rate, at which it lends to banks, by 25 basis points to 5.25 percent.

Further, it raised the reserve requirement for banks by 25 basis points to 6.00 percent. According to estimates, the hike in CRR will suck out Rs 12,500 crore from the banking system. The CRR increase will come into effect from April 24.

"With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalising our policy instruments," RBI Governor Duvvuri Subbarao said in the policy statement.

Interestingly, India last month became the second G-20 economy after Australia, to raise policy interest rates as the world economy recovers from the worst downturn in decades. The central bank last month surprised markets by raising rates by 25 basis points.

Malaysia and China too have begun to use monetary tools to cool their economies.

Is it sufficient?

Though many had foreseen a hike in interest rate, Tuesday’s hike was less than expected. As inflation was continuously rising and food prices were ruling high, many economists predicted that the RBI would go for harsher decisions. A 50 basis point hike in interest rates and a 75 basis point in CRR was their expectation.

However, D Subbarao chose the middle path in full conviction that a marginal hike would not derail the economic growth. If inflation is not cooling off, the central bank would not wait for the next quarterly policy review to further tighten the monetary policy.

This less-than-expected hike has actually restored the confidence of investors in equities. Markets, which are on a losing spree for the last few days, returned to green Tuesday, thanks to the RBI’s cautious move and Asian cues. The BSE sensitive index, Sensex, closed around 60 points higher Tuesday.

However, not everybody welcomes the rate hike decision. “Basically, their statement and tone is hawkish,” Ramya Suryanarayanan, an economist at DBS Bank in Singapore, said.

For the critics, inflation is a result of supply-side bottlenecks and money tightening would not bring the prices down, but endanger the fragile economic recovery.

The low interest rate regime in the US will still facilitate cheap money abroad which can be trashed here in India due to high interest rates – putting pressure on the rupee, they say.

Also all eyes are now on the Rabi crop. A good crop will soften food prices, which would give RBI an opportunity to keep rates low.

“The move is smaller than expected. That suggests that another 25 basis point hike is highly likely this quarter. We expect the repo rate going up to 6.25 percent by end December,” Ramya Suryanarayanan, economist at DBS bank in Singapore, told a financial daily.

In a similar view, Vishnu Varathan, economist at Forecast in Singapore, said the RBI could again hike rates by another 50-75 bps before June-end.

People like, ICICI Securities’ A Prasanna predicted the reverse repo rate at 4.75 percent and repo rate at 6.25 percent by March 2011.

Planning Commission Deputy Chairperson Montek Singh Ahluwalia has made it clear. If inflation eases there won’t be any further immediate rate hike. The undertone is that, the RBI would use the monetary tools again if inflation is not cooling down. Moreover, if the government thinks it can manage inflation only by forcing the RBI to use the monetary tools, there is no doubt that it will hit a road block soon.

The policy rates cannot be raised beyond certain level as it would squeeze the credit flow and dry up demand. Therefore the government should take a serious view of the situation and immediately adopt measures to remove the supply side bottlenecks and hoarding. Only a combined administrative and monetary initiative could tame inflation. The RBI has done its bit. What about the government?

Yuan revaluation: Who stands to gain?

First there was hope, then awe, followed by a pat. But the Dragon knew what was coming in her way.

In January 2009, the US Treasury Secretary Timothy F Geithner accused China of manipulating yuan (Chinese currency) to make the country’s exports more competitive. He was soon joined by President Barack Obama who expressed his frustration over Beijing’s currency policy. Now, as the US Treasury is set to come out with its twice-yearly report on the currency policies of other countries in April, there is a growing speculation that it may label China as a “currency manipulator” – which will result in the US levying duties against US imports of goods from China.

According to some, yuan (also known as remnibi) is undervalued by as much as 40 percent. The western countries, especially, the US, have alleged that China by not revaluing its currency is hurting the global markets. This causes an unbalanced world economy and an advantageous position for China to maintain its share in world trade. However, Chinese Premier Wen Jiabao, came out in defence of yuan.

Notably, in January this year China sped past Germany as world’s top exporter. The Dragon has exported goods worth a staggering USD 1.2 trillion in 2009.

What is devaluation?

Devaluation is lowering of the value of a country`s currency within a fixed exchange rate system and keeping it at fixed rates irrespective of the fluctuations in the global currency market.

The lowering of a currency helps the nation export more vis-à-vis other countries. For example, suppose one dollar is equal to Rs 100. And if the rupee was devalued by 10 percent, the equation becomes USD 1 = Rs 110. This means Rs 10 extra for exporters for every single dollar they earn in the global market.

Many countries, including India, had in the past undervalued their respective currencies owing to various reasons.

China had brought some flexibility in its currency regime in 2005 following US pressure but as the global financial crisis deepened in 2008, it repegged the yuan to the US dollar to boost Chinese exports and revive the economy.

According to an estimate, China let the yuan to appreciate by about 20 percent between 2005 and 2008.

Why the West Cries?

The present US-China barb will not be fully understood without having a look at the complex relations these two super-powers share with each other.

The US is China`s biggest export destination, accounting for over a third of its global exports. This apart, China needs US investments and technological expertise.

China has maintained its reputation as a cheap product maker. The US, which has a huge consumption market, is important for Chinese economy’s northward journey.

On the other hand, China is US’ biggest lender. It holds USD 889 billion worth of US government bonds - creating a potentially potent weapon. If China decides to dump the holdings, US dollar will collapse, plunging the world’s largest economy into deep chaos. This, however, is less likely as it would hurt Chinese investors’ also.

Though the yuan revaluation may not help generate jobs in US, it could prompt other countries (especially Asian) which now hold their currencies in check to compete with China, say trade experts. Therefore such a move is necessary for opening up Asian such markets for American exports.

The financial crisis has only added fuel to fire. The cost sensitive businesses are tempted to use the cheap Chinese goods (eg, steel, tyres, etc), which hurt the domestic companies in the US. Other western countries, which are witnessing a fall in domestic consumption, also want Yuan revaluation, which would boost their exports as well.

Sino-American relations are also governed by political issues. In recent times, the US has sanctioned Chinese steel and tyre exports to the country putting heavy dumping duties on them. The US has also in the recent past blocked China National Offshore Oil Corporation’s takeover bid of the California-based Unocal Corporation on grounds of energy security.

The experts’ take

The argument on remnibi revaluation has been heating up among economists. There has been almost a consensus for a rise in yuan value.

“We have a world economy which is depressed by China artificially keeping its currency undervalued,” Nobel Prize-winning economist Paul Krugman has said in an interview, adding that China’s currency policy has a “depressing effect” on economic growth in the US, Europe and Japan. He even claimed that the global economic growth would be about 1.5 percentage points higher if China stopped restraining the value of its currency and running trade surpluses.

Morgan Stanley Asia chairmen Stephen Roach, however, choose to differ with Krugman. In fact, he warned that the call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances.

Will it benefit anyone?

It is quite well known that US would not benefit directly from yuan’s revaluation – which to some extent is certain now. Instead, it will be the major emerging countries like Brazil, India and South Korea, the main competitors of China in the exports sector, which will benefit.

The Asian nations could ill afford to let their currency to appreciate for fear of losing their export competitiveness to Chinese firms benefiting from the yuan`s government-enforced stability. Neither they can champion their cause, nor can they anger their giant neighbour.

A significant up-valuation of yuan will also rob China of its “cheap labour” advantage. This may nudge the MNCs – who were the backbone of Chinese electronic goods export to US – will likely shift base to other Asian countries including India. The Chinese seem to be well aware of the implications of such a move. So they will most likely continue to defend Beijing’s artificially created stability.

Euro under PIGS threat

“Can a common currency work in Asia? Yes,” read an article in an Indian daily carried in 2006. Four years later, anything suggested remotely would have been scoffed off. The reason: the Eurozone’s mounting economic problems. The crisis in Portugal, Ireland, Greece and Spain, which are also known as PIGS, is now threatening the economic stability of the entire Europe.

Lurking dangers

Greece is known for its liberal spending and borrowing. Coupled with unrestrained lending, this has taken a toll on Greece’s finances. Things got out of control when the financial crisis deepened last year.

According to an estimate, Greece’s national debt has touched USD 413.6 billion, which is bigger than the country`s economy. It is likely to reach 120 percent of the country’s gross domestic product (GDP) in 2010. The country`s fiscal deficit is estimated at 12.7 percent – highest in the EU.

Notably, Greece has concealed its dodgy finances, allegedly with the help of Goldman Sachs, which had precipitated the situation. The debt crisis sent the stock markets across Europe into a tizzy. Fearing that Athen’s trouble would jeopardize the fragile recovery of the global economy, cautious investors started pulling out of equity markets. “If Greece became insolvent and the value of its bonds collapsed, European banks that own those bonds would have to take massive write-offs. That would affect lending, still crimped by the worldwide financial crisis and recession,” Reuters reported recently, underlining the interconnection between different countries.

The crisis could push Europe, including the UK, into a "double dip" recession,” the Independent of UK has warned.

Similarly, Portugal, Ireland, and Spain too are giving the Eurozone countries much consternation. Portugal, which has a population of 10 million, has an unemployment rate of 10 percent - highest in a quarter century.

Ireland`s has a hefty deficit of USD 30 billion, representing 12.5 percent of its GDP, second only to Greece in the 16-nation Eurozone. The Irish republic also has an unemployment rate of 12.6 percent.

The global crisis hit Spain harder than most other Western countries. Spain’s economy is the fourth largest in the Eurozone -- five times the size of Greece`s and almost twice the size of Greece, Ireland and Portugal combined. Worryingly, like Greece, it has high fiscal deficit at 11.4 percent coupled with 19 percent unemployment rate - twice the European Union average. Moreover, Spain is the only major industrialised country not expected to rise out of recession before 2011.

Even Italy, the world’s third-biggest sovereign debtor, is a headache for the Euro Zone countries.

So is the Euro doomed?

Not long ago, when the US was struggling with the recessionary effects and the dollar was free-falling against other currencies, there was a heightened demand for a new global currency.

The 1992 Maastricht Treaty, which led to the formation of the European Union, obliges most EU member countries to adopt the Euro upon meeting certain monetary and budgetary requirements. However, not all states have done so. Sweden said no to the common currency in a 2003 referendum while the UK and Denmark negotiated exemptions.

The Euro, which was introduced to world financial markets as an accounting currency on 1 January 1999, is now the official currency of European Union and is currently being used by the 16 states. It is the second largest reserve currency and the second most traded currency in the world after the Dollar. The rise of Euro prompted many economic thinkers to predict an early end of dolla’s domination in global economy.

However, the global economic scene has changed radically in the past two years. Euro has lost about 10 percent of its value against the dollar since the Greek debt crisis erupted in December 2009. This led people like billionaire investor George Soros to question the currency’s future.

"A makeshift assistance should be enough for Greece, but that leaves Spain, Italy, Portugal and Ireland. Together they constitute too large of a portion of the Euroland to he helped in this way…The survival of Greece would still leave the future of the Euro in question," Soros told the Financial Times.

Many economists have also derided the formation of the Eurozone as a flawed one. Some pointed out the fact that the Eurozone was created as a ‘monetary entity’ and not a ‘political one’, where each country has the right to tax their citizens in their own way while having a common monetary authority in the form of European Central Bank (ECB).

“The construction is patently flawed. A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis, but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency. This is a well-known fact that should have been clear to everyone involved in the creation of the Euro,” Soros says.

However, there are detractors of this theory too. Former US Federal Reserve chairman Paul Volcker dismissed speculation that the Euro is doomed. “I’m still a believer in the Euro,” he reportedly told European authorities.

Conclusion

Though, “all is not well” at the moment for the EU member states, not everything is bad either. An analysis showed how Germany is quietly gaining from the Eurozone crisis.

“The crisis, triggered by market concerns about Greece`s ability to fund its fiscal largesse, gives Berlin more leverage to press for public finance discipline across the Eurozone. Greece`s problems have also bolstered demand for German bonds and thereby lowered Berlin`s borrowing costs, while weighing on the euro to the profit of German exporters,” a news agency reported.

Euro was created to increase the economic interdependency and to ease trade between the EU members that have adopted the currency. This would have eased the free movement of persons, goods and capital. Some analysts have also hoped that this would contain the inflation in the member countries by equalising prices across the Euro area and increasing competition between companies.

Every crisis has its lessons, which highlight the loopholes of existing economic policies. It is apt to remember that there was not a single biggest crisis since 1930s Great Depression till 2008 because the authorities acted on the loopholes. The policies were later weakened by the US authorities that resulted in the 2008 financial crisis.

The Euro for the time being is stable, but its future will depend on how member countries learn from the PIGS conundrum. And those lessons will hold a model for South Asia as well.

Let’s teach the teachers first

“Guru Brahma, Guru Bhisnu, Guru Dev Maheshwar, Guru Sakshyat Pram Brahma Tasmaysri Gurube namah.”

When we asked a question on Zeenews.com the other day, on whether schools in India are ill-equipped to handle the problems of a 21st century child, an overwhelming 91 percent of the respondents answered in the affirmative.

The view might have been emotionally influenced by two recent incidents, but they are justified. In the first incident, 17-year-old Aakriti died as the school authorities failed to give her timely treatment after an Asthma attack.

In another case, school-going kid Shanno died after her MCD school teacher made her squat with seven bricks on her back in the scorching sun in mid-April after she failed to recite the English alphabet correctly.

Both the events are tragic. Notably, both happened in the national capital, Delhi. Another important point to be noted here is that while one incident happened in a reputed public school for the kids of the super rich, the other took place at a local school where the children of the poor receive an education. Clearly, there is no disparity.

Can this is be called an one-off incident? Absolutely not.

The honourable Union Minister for Women and Child Development (WCD), exploiting the incident fully knowing that the elections are underway, tried everything she could do – ordering investigation and providing well-aimed sound bytes to show how deeply she was concerned. But she only found time to visit Aakriti’s family not Shanno’s.

I do not doubt her intentions here at all.

But does our government really care for the standard of education in India?

Personally, I am emotional about this topic because I have seen the pathetic standard of education in my own state, Orissa. Though I have come across several inspiring teachers whom I look up to and regard as catalysts in changing my life, I have also seen many who thrashed their students for no reason at all, and regarded their mere presence in the school premises a fulfilment of their duty.

Teaching is not everyone’s cup of tea. Merely reciting facts from a pile of books before a fidgeting class of youngsters does not make one a good teacher. Rather, it is the art of simplifying the enormous sea of information and putting it before students interestingly, much like a mother feeds her baby. Without compassion, without realising the requirement of the receivers, and even without realising the nobility of this responsibility, teaching becomes an arduous chore.

In Hinduism, we are taught that a Guru’s (teacher) position in our lives is superior to that even of God. We are taught to respect our teachers from the core of our heart and be grateful to them all our life.

If one goes through the Puranas and Vedas, he/she would find numerous instances of the same. But, it is always said that one should choose his/her teachers very carefully.

Coming back to the present from the annals of religion, I would like to present a few realities that offer a glimpse into how serious the government – both at the Centre as well as in the states - is regarding education.

India needs to increase its expenditure on education to six percent of its GDP, which has been accepted year after year by every government since Independence. The Economic Survey 2007-08 also refers to this elusive goal of revenue allocation.

Thankfully there’s a ray of hope. The Right to Education Bill, a legislation sought to enact the 86th Constitutional amendment, was passed by the Cabinet in November 2008 and may soon become an Act, once the new government at the Centre sworn in. Under the 86th Constitutional amendment the governments at the state and Centre will legally bounded to allocate funds for education besides host of other benefit.

The government in the year 2008-09 Union Budget earmarked Rs 34,400 crore for the sector, showing an increase of 20% from Rs 28,674 crore allocated in the last Budget, but was significantly less than the 34% increase implemented in the previous year.

Education, which was originally a state subject, was shifted to the concurrent list by the 42nd amendment.

So far, so good.

Under the Tenth Five Year Plan, in a bid to cover maximum children under the education ambit, the Government of India formulated the para-teachers policy.

Under the policy, simple graduates to even half literate people were employed to fill up the vacant teachers’ posts in government schools. Despite availability of huge funds, most of these posts were vacant due to the inefficiency and mismanagement of state governments.

In Orissa, the government appoints simple graduates as teachers for a meagre Rs 1,500-2,000. They are mostly meant to be primary school teachers where there is an acute dearth of teaching staff. The programme’s primary aim is to employ more and more “literates” to fill vacancies to make the illiterate read and write.

Unavailability of employment opportunities drives people to fill these posts in hordes. This employment opportunity has, as a result, ended up becoming just that - an employment opportunity. This feverish quest for a job has changed the mindset of even trained and qualified teachers, who regard their profession a mere source of employment, rather than the noble profession of imparting knowledge that it actually is.

During my schooling in Orissa, I came across quite a few such ‘uneducated’ teachers; leave alone being taught by adequately trained and sensitive individuals, who are supposed to build the future of India.

“The involvement of educated unemployed rural youth in primary education sounded socially and politically correct. To those seeking reform in the system, along the lines of decentralisation, it promised 'community involvement'. To the politician, it promised a new means of tantalising the vast body of frustrated, jobless youth. To policy planners and bureaucrats, it suggested an innovative way to spend less money on primary education. And to everybody concerned about the state of education in a vague, generalised sense, it offered an opportunity to show to the full-time teacher that he or she was not indispensable,” said Frontline, a popular magazine, in its November 29, 2001 issue.

But consider the facts below:

- In the 1980s, Rajasthan recruited 'shiksha karmis' from among the ‘unemployed’ village youth to act as teachers in the local primary school under the Swedish International Development Authority (SIDA).

- Of all para-teachers schemes, most require an intermediate degree as the qualifying education. Rajasthan SKP is the only scheme where minimum qualification for para-teachers has been kept as low as VIII standard and in case of women - 5th standard!!

True, the government has initiated a number of schemes to spread literacy and to bring about universalisation of elementary education in the country. Notable among these are the Total Literacy Campaign, National Literacy Mission, Operation Blackboard in (1987-88), District Primary Education Programme, National Programme of Nutritional Support to Primary Education, and the omnipresent Sarva Shiksha Abhiyan.

The Indian government had also established Navodaya Vidyalayas in 1985-86 and Kendriya Vidyalayas in 1965 to provide quality education to the talented lot in the country.

But all these steps have been far from sufficient to provide decent quality education to the average mass, which is still poor. Moreover, in the light of the above facts, it is brazenly inadequate.

While funds are available, the motivation and sensitivity that drives the fire of education is missing.

A recent Bollywood hit ‘Tare Zameen Par’ highlighted this sensitive and insightful quality that helps in understanding the student’s plight with a sympathetic and skilled mindset. The protagonist, a dyslexic kid, is saved from permanent emotional and personality scarring by such a teacher. The child is tutored by the keen teacher and is discovered to be an excellent performer and a gifted student.

Conclusion - let’s teach the teachers first.

Orissa’s Nano

“Look, how we are living today,” a middle age man said to his friend, pointing his finger at thin, dirty looking passengers in the general bogey of Howra mail.

“They could have had a better life if at all the government implemented all the big projects here in Orissa. But the politics is so dirty here that any developmental plan just doesn’t take off,” he sighed.

His impromptu analysis is not that bad. After all, lakhs of people from Orissa migrate to other cities like Surat, Ahmedabad, Delhi etc in search for greener pastures.


But does that mean big industrial projects like POSCO, Mittal Steel, Tata Steel would solve all their problems.

The question became all the more relevant after Orissa government reportedly sought referendum on POSCO-India's proposed mega steel plant, failing to implement South Korean steel major's Rs 51,000 crore project near Paradip due to local opposition.

The project, which is the single biggest Foreign Direct Investment in India, has been a non-starter since the MoU was signed in 2005. Construction of the project was originally scheduled to start in April 2008.

The POSCO’s proposed plant in Jagatsingpur district not only faced hurdles in land acquisition, it is also struggling to acquire regulatory clearances as it is awaiting mining leases.

Trapped Projects

Another big buck project of ArcelorMittal in Keonjhar district is also facing stiff resistance from the locals. ArcelorMittal is to build a 12mtpa capacity Greenfield steel plant in Keonjhar district at an investment of Rs 40,000 crore. Incidentally, the company which had signed an MoU with the state government to set up the mega steel plant in December 2006, had given direct employment to only 12 persons.

There are in all 49 companies, which had signed Memorandum of Understanding with the state government to set up their projects.

On January 9th this year, the state government had decided to review the progress on a monthly basis to push these projects, which were facing hurdles either on the land acquisition front or for getting mining leases.

As per the state government, in the pipeline, Keonjhar district has the highest proposals of 10 steel plants followed by Jajpur (8), Dhenkanal, Sundergarh, Jharsugudua (7), Sambalpur (5), Cuttack (4) Jagatsinghpur and Anugul (2 each).

All is not “always” well

One wise man once rightly said that the grass always looks green on the other side. It is quite easy to say that big projects will overnight change the living standards of poor as it has done in the West. But it has been proven that the ‘Trickledown Theory’ does not always hold true. Also is there any surety that industry will provide a better life to the inhabitants of the area?

During my days in Keonjhar, I had the chance to get a sneak peak into the lives of the tribals and the poor residents of the region. They have a really hard time to arrange rice and dal even twice a day. I could not come across even a single instance where they had three square meals a day, leave alone any delicacies.

Now, one would wonder why they are not giving up their resistance and allowing factories to come up there. The simple arithmetic is that once the factory comes up, people will be employed there and they would earn more money and have a better life.

But, there is much more that meets the eye. It is obvious that, just like us, the tribals also have their way of thinking. It is naïve to think that once they leave their land, they will get a job as they hardly have any formal education.

Second, never has any government in India (State or the Union) set any example of successful rehabilitation of the displaced people. Look at the Sardar Sarovar Dam or Orissa’s own Hirakud Dam. In both cases, after years of successful completion of the projects the displaced people are still fighting for justice.

How could a village, which is established in the best possible area, be shifted to somewhere else, just because someone at the state capital or in national capital says so.

It’s not that every tribal and poor in the area is up in arms against the industries. They too want factories and jobs to be available to them locally. But they want a concrete assurance and a better deal.

There are environment issues also. And moreover industrialists like Vedanta do not have a clean image as far as environmental issues are concerned.

But one of biggest factors that contributes to the stalemate is local politics. Every faction wants to take the advantage of the situation. There is no consensus at all among big political parties. When Congress was in power, BJP used to veto the projects and vice versa. The Tata Nano fiasco in the neighbouring West Bengal is a perfect example of what petty politics can do to the development of a state.

Vedanta has already given an indication to relocate its-yet-to-start project to Karnataka. Hopefully, Chief Minister Mr Naveen Patnaik, whose government at the helm helped the state to grow at a stunning rate of 8.74% from 2004-05 to 2008-09, will not allow a Nano to happen in his state.

RBI's Biggest dilemma

In a previous article titled, “Post Recession Blues”, I had cited how difficult it would be for central bankers and governments across the world to withdraw the gigantic amount of money pumped into the financial system through various stimulus packages. The bankers resorted to the unprecedented move to push up demand and revive growth as the world was struggling with one of the worst post-war recessions.

Many policy makers and economists have echoed the same. It will be a Catch-22 situation for the Reserve Bank of India (RBI), the country’s central bank, when it will sit to review the monetary policy on January 29.

"If you suck out liquidity, other sectors get affected; roads get affected...So it’s a complex issue," RBI Deputy Governor KC Chakrabarty noted, indicating the delicacy of the situation.

On the one side, inflation is rising to new highs and on the other industry leaders are repeatedly asking the government not to withdraw the stimulus. The Wholesale Price Index-based inflation, which has jumped to above 7 percent from 4 percent in December, is now expected to touch double digit figures by the fiscal end.

According to Venu Srinivasan, president of the Confederation of Indian Industry, the fiscal stimulus should continue for another six months, besides the implementation of Goods and Services Tax (GST) to help firms reduce costs.

Added another industry lobby, the Associated Chambers of Commerce and Industry (Assocham): "Stimulus package should not be suddenly withdrawn, but should be gradually phased out as the industry is just coming out of the recession and inflation rate has already increased significantly during December 09."

The government is also under pressure to reduce its fiscal deficit, estimated at 6.8 percent of gross domestic product (GDP) for 2009-10, as it has increased its borrowing to a record Rs 4.51 trillion.

“Too much of stimulus, when the body is getting healthy, is not good, it can be injurious to health," Finance Secretary Ashok Chawla said recently.

The United Progressive Alliance (UPA) government had introduced a host of stimulus measures including excise duty cuts by 6 percent, service tax reduction by 2 percent and enhanced expenditure in social and infrastructure sectors, besides agriculture loan waiver to the tune of Rs 65,000 crore and implementation of the Sixth Pay Commission recommendations.

The fiscal and monetary sops introduced by both the RBI and the government led to the economy bouncing back with growth in the second quarter of 2009-10 standing at 7.9 percent against 6.1 percent in the first quarter and 5.8 percent each in the preceding two quarters.

Between September 2008 and January 2009, the RBI had cut repo rate by 425 basis points, reverse repo by 275 basis points, and cash reserve ratio (CRR) by 400 basis points to prop up the economy.


What is monetary policy?

Monetary policy is a policy document, which is traditionally announced by the RBI, through which it seeks to ensure price stability for the economy. Along with fiscal policy, it is an important tool to influence the macroeconomic policy. Primarily, it is used to regulate the flow of money supply to the system.

For example, whenever the central bank wants to pump up the currency availability in the market, it simply lowers the CRR (the level of deposits banks are mandated to park with the RBI) and repo rate (the rate at which our banks borrow rupees from RBI). A reduction in the repo rate will help banks to get money at a cheaper rate. Similarly, when the CRR goes down, banks are required to park less money with RBI. Hence the total money with the banks will go up.

Another tool for the RBI is reverse repo rate, which is the rate at which apex bank borrows money from commercial banks. An increase in reverse repo rate can encourage the banks to transfer more funds to RBI. This can be used to suck out the additional liquidity from the system. Now, in order to do the reverse, the RBI simply has to hike the interest rates.

Will RBI hike rates?

Most likely. “I expect the RBI to hike cash reserve ratio by 50 basis points. The central bank could also raise repo and reverse repo rates by 25 basis points each," says DK Joshi, principal economist at rating agency Crisil.

However, some analysts think otherwise. “Don’t expect much of a change in the key interest rates in the RBI policy. Inflation is due to supply side issues, especially of food items, which have small weight in the WPI,” says S.A. Dave, chairman at the Centre for Monitoring Indian Economy (CMIE).

How will it affect us?

If the RBI raises interest rates, the first sector to take a hit is the credit industry. Loans will no longer be that cheap. Banks will have to hike various loans including car loans, home loans etc.

It has other implications too. As there will be less money in the market, it would dampen demand and thereby contain inflation to some extent.

The international scenario

All major economies of the world, on the sidelines of last year’s G20 meet in Pittsburg, US, had decided against any hasty withdrawal of stimulus measures. Global financial institutions like the International Monetary Policy (IMF) have repeatedly warned against early withdrawal, saying it would jeopardise the fragile recovery.

However, the improved performance of big economies, including the US, has boosted confidence of many policy makers to take bold actions. This has brought the focus back onto inflation.

Australia was the first country in the Organisation of Economic Cooperation and Development (OECD) to hike the interest rates in 2009. China’s Central Bank too followed suite with a surprise interest hike in January first week. However, Bank of England left interest rates at a record low of 0.5 percent in January and announced no change in its 200 billion pounds (USD 320 billion) monetary stimulus programme.

It would now be interesting to see how the RBI proceeds from now on.

Can the ‘mortal’ newspaper survive?

Good journalism is not free: Rupert Murdoch

Recently, Google bowed to the persistent demands of media giants and decided to look at options to restrict the free accessing of unlimited news via the online platform. This has attracted widespread attention as it is a clear indication of the growing population of online news readers. The Google assurance came in the backdrop of massive fall in newspaper circulation in USA. Reportedly, there has been an over 10% drop in newspaper circulation in the country in 2009.

The rise of Internet is one of the biggest nightmares for the print media industry. An ubiquitous internet is still growing manifolds with better and faster technology. This is palpable looking at the significant growth of online readers in the past few years.

An online newspaper is easy to use and it can be accessed even through your mobile phone. Better search options and unlimited archive facility makes it all the more lucrative.

The major contributing factor to this spurt in online popularity is that a large part of the population is the technologically advanced younger generation. Besides, internet is also more easily accessible and its penetration is growing faster than ever before.

So, does this spell the end of the print media?

Current Status:

Recession has a marked impact on the media at large. While the print advertising revenues reported a drop of 28.95 percent, the digital newspaper advertisement revenue dropped more than 17 percent in the US (third quarter data of 2009).

Print media advertising revenues also fell across the continents with an estimated drop of 20 percent in North America, 19 percent in Eastern Europe, 16 percent in Western Europe, and 11 percent in the Asia Pacific in 2009, according to PricewaterhouseCoopers.

In the past one and half year several newspapers and magazines closed and several others went online to cut expenses and to stay in the business.

Even big newspapers like Guardian, Time, The Daily Telegraph and the New York Times has had to embrace newer platforms like smartphone applications to stay in the business.

The Indian Readership Survey, which was published earlier this year, highlighted the plight of major publication in the subcontinent.

While few English dailies gained in readership, most have suffered and lost a big chunk of their readers. Magazines received even a bigger jolt – 13 out of the top 20 magazines have seen a drop in average issue readership.

According to a study conducted by the Madison-Pitch, print media advertising has seen a 32% drop in the first half of 2009 compared with the previous year; and television, 19%. Only the Internet saw an increase in ad revenue by 16%.

So is it that the rise of internet is luring away the print media’s target audience?

According to World Association of Newspapers and News Publishers (WAN-IFRA), Japan, which is most digitized society in the world today, boasts 612 copies of newspapers for every thousand people. The same figure for India is 142 copies. In terms of reach, 91 percent of Japanese continue to read a newspaper daily despite being a technologically advanced and ‘well-wired’ society.

Moreover, the newspaper circulations globally are up by 1.3 percent in 2008 and have risen by 8.8 percent in the past five years.

WAN-IFRA further said that the newspaper circulations increased in about 100 countries of the world. Globally, 1.9 billion people choose to read a paid newspaper everyday and its reach is 34 percent of the total global population while 24 percent use the Internet. Also, newspapers reach 41 percent more adults than the World Wide Web.

Moreover, out of the total USD 182 billion advertisement industry, the newspaper digital advertisement revenue accounted for less than USD 6 billion in 2007 and it has been forecasted by PricewaterhouseCoopers that it would grow to no more than 8.4 billion dollars by 2013.

Also WAN-IFRA has said that digital advertising will not replace the print advertising in foreseeable future.

The Future

The newspaper industry is centuries old. It has been in the society since the days of yore when kings and their anarchic kingdoms circulated it in the form of leaflets. Over the years it has developed as one of the four pillars that are an essential part of contemporary democracy.

It has embraced newer techniques to reach out to the audience. The recent struggle of print media industry with its online cousin is palpable. Already the newspaper industry has started making good use of the online media to the best of its capabilities.

Also, the growing concern on climate change will pose a challenge for the industry. Paper, which is the lifeline of the industry, is produced from wood. Though paper can be recycled several times, cutting trees can be prevented. At some point of time we have to stop this and embrace more ecologically viable options.

It remains to be seen whether newspapers can adapt to multitude of challenges that it is facing.